When looking at Financial Statements, a common question is:
How healthy is the business?
Let's talk about the Balance Sheet:
How healthy is the business?
Let's talk about the Balance Sheet:
All Balance Sheets are based on this formula:
Assets = Liabilities + Equity
At any date in time, this formula will be true. The balance sheet communicates those values on a specific date (and any date you choose).
Let’s discuss the components and how to analyze it:
Assets = Liabilities + Equity
At any date in time, this formula will be true. The balance sheet communicates those values on a specific date (and any date you choose).
Let’s discuss the components and how to analyze it:
Assets are what you own:
• Cash
• Accounts Receivable (money owed to you)
• Inventory (product in your possession but not sold)
• Fixed Assets (property, equipment, machinery, or vehicles)
• Intangible Assets (software, licenses, trademarks, or goodwill)
• Cash
• Accounts Receivable (money owed to you)
• Inventory (product in your possession but not sold)
• Fixed Assets (property, equipment, machinery, or vehicles)
• Intangible Assets (software, licenses, trademarks, or goodwill)
Liabilities are what you owe.
They’re broken down into 2 categories:
• Current Liabilities (owed in less than a year)
• Long-term liabilities (owed in more than a year)
They’re broken down into 2 categories:
• Current Liabilities (owed in less than a year)
• Long-term liabilities (owed in more than a year)
Current Liabilities mature in less than one year:
• Accounts Payable (money owed to vendors)
• Credit Card Payables (just different accounts payable)
• Short-term debt (obligations to pay)
• Current portion of long-term debt
• Accounts Payable (money owed to vendors)
• Credit Card Payables (just different accounts payable)
• Short-term debt (obligations to pay)
• Current portion of long-term debt
Long-term Liabilities can include:
• Car loans
• Equipment loans
• Long-term leases
• Deferred compensation
• Car loans
• Equipment loans
• Long-term leases
• Deferred compensation
Equity is how much the company is worth on paper.
It can be labeled in a lot of different ways, but the components are the same:
• Common stock (initial capital investment)
• Owner’s contributions
• Owner’s distributions
• Retained earnings
It can be labeled in a lot of different ways, but the components are the same:
• Common stock (initial capital investment)
• Owner’s contributions
• Owner’s distributions
• Retained earnings
The owner’s accounts are helpful to show the capital that is coming in and out of the business.
Net Profit from the Income Statement goes into Retained Earnings.
Net Profit from the Income Statement goes into Retained Earnings.
To analyze this statement, here are some common ratios:
• Accounts Receivable Aging
• Cash Conversion Cycle
• Debt-to-equity Ratio
• Return on Ratios
• Liquidity Ratios
• Accounts Receivable Aging
• Cash Conversion Cycle
• Debt-to-equity Ratio
• Return on Ratios
• Liquidity Ratios
• Accounts Receivable Aging
This report will show the invoices outstanding and how old they are.
It’s important to watch it closely and make regular contact with customers who are past due.
Sometimes customers need to be “cut off” for failing to pay.
This report will show the invoices outstanding and how old they are.
It’s important to watch it closely and make regular contact with customers who are past due.
Sometimes customers need to be “cut off” for failing to pay.
• Cash Conversion Cycle (CCC)
CCC measures time from investment to a collection of revenue.
CCC = DIO + DSO - DPO
â–¸ DIO = time in inventory
â–¸ DSO = time as a receivable
â–¸ DPO = time to pay bills
To go deeper, check out this thread:
CCC measures time from investment to a collection of revenue.
CCC = DIO + DSO - DPO
â–¸ DIO = time in inventory
â–¸ DSO = time as a receivable
â–¸ DPO = time to pay bills
To go deeper, check out this thread:
• Debt-to-equity Ratio
Total Liabilities / Total Equity
This determines how leveraged the company is.
The higher the number, the more risky the company is.
0.5 to 1.5 is considered to be a good range. As you get higher than 1.5, banks and lenders start to get nervous.
Total Liabilities / Total Equity
This determines how leveraged the company is.
The higher the number, the more risky the company is.
0.5 to 1.5 is considered to be a good range. As you get higher than 1.5, banks and lenders start to get nervous.
• Return on Ratios
These tell you what your return on investment is based on the measurables most important to your business.
â–¸ Trying to use your assets efficiently?
Return on Assets (ROA) = Net Income / Total Assets
These tell you what your return on investment is based on the measurables most important to your business.
â–¸ Trying to use your assets efficiently?
Return on Assets (ROA) = Net Income / Total Assets
â–¸ Looking to measure financial efficiency compared to competitors?
Return on Equity (ROE) = Net Income / Shareholder’s Equity
▸ Wonder how efficiently you’ve deployed investor capital?
Return on Invested Capital (ROIC) = Operating Income after Taxes / Invested Capital
Return on Equity (ROE) = Net Income / Shareholder’s Equity
▸ Wonder how efficiently you’ve deployed investor capital?
Return on Invested Capital (ROIC) = Operating Income after Taxes / Invested Capital
â–¸ Want to understand how well current capital is utilized (especially in capital-intensive industries)?
Return on Capital Employed (ROCE) = Earnings before Interest & Tax (EBIT) / (Total Assets – Current Liabilities)
Return on Capital Employed (ROCE) = Earnings before Interest & Tax (EBIT) / (Total Assets – Current Liabilities)
• Liquidity Ratios
These ratios measure your ability to turn assets into cash.
Which one you use depends on your situation.
Current Ratio = Current assets / Current liabilities
Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
These ratios measure your ability to turn assets into cash.
Which one you use depends on your situation.
Current Ratio = Current assets / Current liabilities
Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
These are especially good when not making a profit or taking investor money:
Cash burn rate = (Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
Cash Runway = Total Cash Reserve / Burn Rate
Cash burn rate = (Cash Balance Beginning of Period – Cash Balance End of Period) / # of Months in Period
Cash Runway = Total Cash Reserve / Burn Rate
I hope this was helpful!
Tomorrow I’ll be diving into the Statement of Cash Flows, so follow me so you don’t miss it: @KurtisHanni
Tomorrow I’ll be diving into the Statement of Cash Flows, so follow me so you don’t miss it: @KurtisHanni
Want a deeper dive?
Join my cohort where I teach how to:
- Read Financial Statements
• Create KPIs & manage cash flow
• Making numbers-based decisions
We start next week: kurtishanni.com
Join my cohort where I teach how to:
- Read Financial Statements
• Create KPIs & manage cash flow
• Making numbers-based decisions
We start next week: kurtishanni.com
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Each week I break down one financial concept to educate and get you thinking differently about your numbers.
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Each week I break down one financial concept to educate and get you thinking differently about your numbers.
Join 6k others:
getrevue.co
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